appraisal guide for microfinance...

Appraisal Guidefor Microfinance

InstitutionsA Technical GuideA Technical Guide

Appraisal Guidefor Microfinance

Institutions

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Appraisal Guide for Microfinance

Institutions

Revision of 1999 Appraisal Handbook

Jennifer IsernJulie Abrams

with Matthew Brown

Consultative Group to Assist the Poor

Appraisal Guide for Microfinance Institutions: A Technical Guide is

available for download from the CGAP Web site

(http://www.cgap.org/) publications page.

© 2007 Consultative Group to Assist the Poor/The World Bank

All rights reserved.


1818 H Street, N.W.

Washington, DC 20433

Internet: www.cgap.org

Email: [email protected]

Telephone: +1.202.473.9594

Table of Contents

About the Authors vii

Acknowledgments ix

Foreword xi

Microfinance Appraisals: Why and How xiii

Chapter One: Funding Recommendation 1

Chapter Two: Overview 2

2.1 Summary Institutional Data 2

2.2 Vision and Mission 4

2.3 Organizational Strengths and Weakness 5

2.4 Macroeconomic and Political Environment 5

2.5 Other External Environmental Factors 6

Chapter Three: The Institution 7

3.1 Ownership and Governance 7

3.2 Management 9

3.3 Organizational Structure 9

3.4 Human Resource Management 10

3.5 Information and Communications Technology 12

3.6 Internal Controls 14

3.7 Internal Audit 15

3.8 External Audit 15

3.9 Regulation and Supervision 16

3.10 Ratings 17

3.11 External Relationships 17

Table of Contentsiv

Chapter Four: Products 18

4.1 Voluntary Savings 19

4.2 Loans 23

4.3 Other Financial Products 26

4.4 Nonfinancial Products 26

Chapter Five: Social Performance 27

5.1 Intent and Design 27

5.2 Depth and Breadth of Outreach 27

5.3 Changes in Social and Economic Lives 28

of Clients and Their Households

Chapter Six: Loan Portfolio Quality 29

Chapter Seven: Financial Performance and Risk Management 33

7.1 Financial Statement Analysis 34

7.2 Analytical Adjustments 45

7.3 Financial Performance Ratios Analysis 46

7.4 Risk Management 50

7.5 Liquidity Risk Management 52

7.6 Interest Rate Analysis 52

Chapter Eight: Business Planning 54

8.1 Financial Projections 54

8.2 Funding Strategy 55

References 57

Table of Contents

Tables

Table 2.1 Summary of Key Data 2

Table 3.1 MFI Ownership Summary 8

Table 3.2 Staffing Summary Data 11

Table 4.1 Product Summary 18

Table 4.2 Voluntary Savings Products Summary 21

Table 4.3 Loan Product Summary 24

Table 5.1 Outreach Summary 27

Table 6.1 Loan Portfolio Report 29

Table 7.1 Income Statement 34

Table 7.2 Balance Sheet 35

Table 7.3 Cash Flow Statement 37

Table 7.4 Composition of Funding Liabilities 42

Table 7.5 External Grants and Subsidies 43

Table 7.6 Macroeconomic Data 46

Table 7.7 Performance Ratios and Peer Group Benchmarking 50

Table 7.8 Comparison of Actual and Theoretical Yields 53

Table 8.1 Projected Performance 55

v

Jennifer Isern (CGAP) led the development of the revised appraisal guide, resource man-

ual, and accompanying Excel spreadsheet. The principal authors of this appraisal guide

are Jennifer Isern and Julie Abrams (Microfinance Analytics). Matthew Brown con-

tributed extensively to an earlier draft while he was research assistant at CGAP in

2004–05.

About the Authors

vii

ix

The authors thank the many dedicated professionals who helped to shape this technical

guide. In particular, we thank Richard Rosenberg (CGAP) for providing extensive com-

ments throughout the development of the guide. We also thank Kim Craig, who devel-

oped appraise.xls, the accompanying Excel spreadsheet to generate summary tables for

the appraisal report, and provided useful comments on the appraisal guide. In addition,

we are grateful for helpful comments from the following:

Delle Brouwers-Tiongson (Oikocredit)

Phillip Brown (Citicorp)

Rani Deshpande (CGAP)

Natasa Goronja (CGAP)

Syed Hashemi (CGAP)

Brigit Helms (CGAP)

Martin Holtmann (CGAP)

Gautam Ivatury (CGAP)

Marc Jacquand (United Nations Development Programme)

Barry Lennon (U.S. Agency for International Development)

Ruth Dueck Mbeba (MEDA)

Patricia Mwangi (CGAP)

Elena Nelson (ACDI/VOCA)

Katarzyna Pawlak (Microfinance Centre)

Guillermo Salcedo Jimenez (Oikocredit)

Anton Simowitz (Imp-ACT)

Frances Sinha (Micro-Credit Ratings International Ltd)

Blaine Stephens (Microfinance Information eXchange)

Marilou von Golstein Brouwers (Triodos Bank)

Damian von Stauffenberg (MicroRate)

The appraisal guide was edited by Paul Holtz.

Acknowledgments

xi

The Consultative Group to Assist the Poor (CGAP) produced its first guide to appraising

microfinance institutions (MFIs) in 1996, for internal use in evaluating MFIs being con-

sidered for grants. Before long, colleagues from other organizations were asking for copies

and adapting the document for other purposes. CGAP published a version for general use

in 1999.

The present updated version is intended primarily for two types of users: funders that

are considering support for, or investment in, MFIs and MFIs that are conducting self-

evaluations.

This revised MFI Appraisal Guide includes new sections on analyzing savings, poverty

outreach, information systems, and risk management. In addition, this Guide includes

new indicators and financial statement formats agreed within the microfinance indus-

try from 2003 to 2005.

Users should note some important cautions:

• The Guide is not a one-size-fits-all tool. It calls for a lot of detail and analysis because

it was designed for use with relatively mature MFIs (generally, MFIs with more than

3,000 clients and three years’ experience) being considered for large investments (often

several million dollars). For smaller or newer MFIs, or for smaller investments, a less

intense review may be appropriate. Indiscriminate use of the format may result in

MFIs being burdened with requirements to produce information that is either unnec-

essary or unlikely to be used by the donor or investor requesting it. Sample terms of

reference for a lighter analysis and a more thorough analysis are included in the

Resource Manual that accompanies this Appraisal Guide.

• The Guide assumes the involvement of a highly knowledgeable analyst. It is essen-

tially a checklist of information to be gathered, and the analyst’s judgment is critical

in deciding which information is worth pursuing and in evaluating the information

collected. If the person conducting the appraisal lacks substantial experience with

MFIs and good financial analysis skills, the results will not be reliable.

Foreword

• This revised Guide gives more attention to assessing poverty levels of the MFI’s clients.

However, a serious poverty analysis may require more resources than are budgeted

during a typical appraisal. The Resource Manual references several guides for deter-

mining client poverty, including CGAP’s Poverty Assessment Tool.

The Guide is a work in progress; CGAP plans to field test this version through June 2007.

Suggestions for improvements are welcome. Please send comments or suggestions by email

to Jennifer Isern ([email protected]) or contact us at the CGAP Operational Team

offices (mailing address: CGAP, 1818 H Street NW, Washington, DC 20433, USA; fax

202-522-3744).

Elizabeth Littlefield

Chief Executive Officer


xii Foreword

xiii

This appraisal guide (and its companion resource manual and electronic spreadsheet,

appraise.xls) incorporates the latest microfinance knowledge and best practices to form

a comprehensive guide analysts can use to evaluate microfinance institutions (MFIs). For

the purposes of this guide, MFIs are defined as licensed and unlicensed financial institu-

tions that include nongovernmental organizations (NGOs), commercial banks, credit

unions and cooperatives, and agricultural, development, and postal savings banks. They

range from specialized microfinance providers to programs within larger, multipurpose

development organizations.

Purpose of an appraisal

Funders use appraisals to help them make informed funding decisions. Funders can be

foreign or domestic donors, foundations, development agencies, or NGOs. Funding can

take the form of loans, grants, equity investments, or financing for technical assistance.

Reports generated through the process described in this appraisal guide enable existing

and potential funders of MFIs to assess the following:

• How well does the MFI match the funder’s strategic priorities?1

• Is the MFI efficient, well managed, and profitable (or en route to being so)?

• What is the quality of the MFI’s products? Do they meet client needs?

• Would funding add value to the MFI?

This guide is primarily for funders and their qualified consultants who analyze the MFI.

But others, such as MFIs conducting self-assessments or diagnostics or commercial banks

or investors considering issuances of debt or equity, will find it useful. Commercial and

quasi-commercial investors and raters are not the primary target of this guide because

they typically have their own assessment and due diligence processes.

Microfinance Appraisals—Why and How?

1 For example, a donor may want to have an impact on certain regions, target MFIs at a certain point in their institutionallife cycle, target certain types of clients, fulfill certain types of MFI funding requirements, or focus on social performance.Ideally, the donor should be clear on what its objectives and focus are, and if this investment would further those objectives.

Before initiating an appraisal, a funder should find out whether an MFI has received

a rating from a rating agency.2 If high quality and recent, information in an MFI’s rat-

ing report is sometimes sufficient for making a funding decision.3 In other cases, rating

information may need to be supplemented by an appraisal. If no rating exists, a funder

may want to consider commissioning one, or hiring a rating agency to conduct a confi-

dential, less formal evaluation in place of an appraisal.

This guide is organized in the form of an outline of a complete appraisal report. The

report should begin with a funding recommendation that is one to two pages long. The

recommendation should include a summary of key factors and any mitigating circum-

stances. The body of the report should be brief—about 10 pages—but it should provide

sufficient supporting information for the funder to make an informed funding decision.

A complete report covers seven areas:

1. Overview—summarizes the MFI’s vision and mission, organizational strengths and

weaknesses, and macroeconomic, political, and other external factors.

2. Institution—describes the MFI’s ownership and governance, organizational structure,

regulation and supervision, management, external relationships, human resource man-

agement, information and communications technology, information availability and

quality, internal controls, and external auditing.

3. Products—analyzes the MFI’s voluntary savings, lending, and financial and nonfinan-

cial products.

4. Social performance—assesses how well the MFI translates its social goals into prac-

tice, looking at systems, outreach, and potential for achieving impact.

5. Loan portfolio quality—reviews how the MFI measures, monitors, and manages its

loan portfolio, including delinquency and write-offs.

6. Financial performance and risk management—analyzes the MFI’s financial perform-

ance, risk management, and financial ratios.

7. Business planning—evaluates the MFI’s strategic and business planning processes and

financial projections.

xiv Appraisal Guide for Microfinance Institutions

2 Ratings and other information about the risk and performance of MFIs are available from the Microfinance Rating andAssessment Fund (www.ratingfund.org), an initiative sponsored by CGAP, the Inter-American Development Bank, andthe European Union.3 See the Microfinance Rating and Assessment Fund (www.ratingfund.org) for more information.


Each area has a corresponding section below, with key questions and issues for funding

decisions identified using the following format:

• Essential information is starred (H) and appears in boldface.

• Crucial information is starred (H).

• Topics of material concern are indicated with this symbol:

The accompanying resource manual provides supplemental information, analysis, and ref-

erences, though it is too comprehensive to be used as the basis for terms of reference for

an MFI appraisal. Finally, a companion spreadsheet—appraise.xls (for use with Microsoft

Excel)—provided on the CD-ROM included with this publication and on the CGAP Web

site (www.cgap.org) can be used to generate summary tables for appraisal reports. Selected

summary tables are included below; the resource manual contains additional tables and

instructions for using the spreadsheet.

Conducting an appraisal

The amount of time required to conduct an appraisal depends on the funder’s desired out-

puts and deliverables. A qualified, experienced analyst would need at least two to three weeks

to complete a comprehensive appraisal—including a site visit of 5–7 days or more—depend-

ing on how much information is readily available from the MFI. A complete appraisal would

be appropriate only for significant funding decisions, and even then, the topics for analysis

should be carefully selected. It rarely makes sense to apply the full appraisal guide.

A shorter appraisal may involve 2–3 days in the field and lighter reporting. Funders

should consider a full or shortened appraisal only if preliminary discussions indicate that

funding is reasonably likely, because gathering and analyzing information needed for the

appraisal requires the MFI to collect substantial preparatory data.

An appraisal must answer two overarching questions:

1. Does the MFI’s mission align with the funder’s?

2. Is the MFI a viable and profitable institution (or does it have realistic and timely plans

to become one)?

Answering the second question requires thoroughly analyzing an MFI’s operations to

determine whether it is a fundamentally sound institution with a clearly identified and

xv

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implemented mission and strong management and processes that support its goals. The

analyst also should assess the potential impact of extreme or unexpected situations, such

as drought, national or local civil unrest, severe inflation or exchange rate devaluation,

or sudden loss of a key manager or technical staff, on the MFI and its portfolio.

Although a lot of information is available about most MFIs, funders generally prefer

brief decision documents. The analyst should focus on topics relevant to the funding deci-

sion, and not simply apply an exhaustive checklist of information. Appraisals should pro-

ceed in carefully conceived stages—from deciding its design, to planning and conduct-

ing the site visit, to preparing the appraisal report.

Step 1: Structuring the appraisal

Before commissioning an appraisal, the funder should identify its main goals for doing so

and establish clear terms of reference for the analyst. For an investment to succeed, the

funder should be familiar with the type of MFI it is considering funding and the envi-

ronment in which it operates.4

Terms of reference should draw on various sections of this guide, based on the

appraisal’s purpose, the type of funding proposed, and features of the MFI gleaned from

a rating or other informed sources. Only in rare cases involving major funding propos-

als should the entire appraisal guide be used as the terms of reference for analysts. Sample

terms of reference, including a short appraisal of 2–3 days and a more complete appraisal

with 5–7 days for a site visit, are provided in Annex 1 of the resource manual.

Step 2: Identifying and selecting the analyst

Successful appraisals require experienced analysts with excellent judgment. This guide

assumes that the appraisal will be conducted by at least one external analyst who has

direct experience with microfinance appraisals or ratings. The analyst also should be flu-

ent in speaking and reading the working language of the MFI. Given the brief timeframe

and many topics to be covered, the analyst must prioritize which information to collect

and synthesize relevant findings for the funding decision.

Analysts should be chosen carefully. Recommendations may not be reliable unless their

source is knowledgeable about microfinance (or at least financial services). Although the

xvi Appraisal Guide for Microfinance Institutions

4 For donor guidance on selecting the most appropriate funding initiatives visit CGAP’s Donor Information Resource Centre(www.cgap.org/direct).


Microfinance Gateway maintains a registry of consultants (www.microfinancegateway.org/con-

tent/member/), keep in mind that this list is subject to only minimal quality control. After pre-

liminary selection, the quality of an analyst’s work should be assessed by asking for references

from relevant completed projects or by requesting copies of previous appraisal reports, then

having a microfinance specialist review them.

Step 3: Mapping out the appraisal

The analyst should first devise a plan for conducting the appraisal. The first step is to clar-

ify expectations and processes with the funder, the MFI’s board and management, and

other major stakeholders. Involving the MFI’s leadership from the outset can help them

better understand their organization’s operations and improve its performance.

The analyst should identify the best ways of collecting and compiling information from

the board, staff, and clients at the MFI’s head office and selected branch offices. The ana-

lyst—not the MFI—should make the final decisions about which branches to visit and

whom to interview, ensuring that these represent the MFI’s diverse operations.

Step 4: Gathering documents before the site visit

Before the visit, the analyst should ask the MFI to provide the following information:

• External reports about the MFI from the past two years, such as ratings, assessments,

evaluations, and impact studies

• Audited financial statements for the past two years

• Unaudited financial statements for the year to date5

• Complete chart of accounts for the year to date

• Complete set of summary reports from the loan tracking system

• Documentation of funding liabilities

• Organizational chart

• List of board of directors, including curriculum vitaes, if possible

• List of committee memberships of board of directors (if board has committees)

• Minutes from past three meetings of board of directors6

• Description of financial and nonfinancial services

• Operations manual

xvii

5 When possible, internal financial data should be sent as Excel files.6 The minutes can help determine if there is continuity and follow-up between board meetings.

• Personnel manual

• Credit manual

• Loan loss provisioning, write-off, and recovery policies (if not in credit manual)

• Savings manual

• Internal controls manual

• Internal audit policies and manual

• Risk management policies

• Relevant microfinance regulations from national regulator

• Relevant regulatory interest rate ceiling policies

• Internal reports monitoring clients at entry, dropouts, market assessments, and other

research

The MFI should provide this information only if it already exists and is readily avail-

able; it should not calculate new data, draft policies, or make any other significant efforts

in response to the appraisal. If an item is unavailable before the site visit, the analyst can

try to obtain it during the visit.

After receiving the financial statements and other documents, the analyst should deter-

mine whether appraise.xls (the accompanying spreadsheet) is the best format for com-

piling the MFI’s data, based on the amount and quality of data. (If little information is

available, the analyst should consider using a simpler spreadsheet.) If appraise.xls is used

and information is provided in advance, input the data before the visit and verify on-site

with key MFI personnel.

Appraise.xls is designed to help the analyst collect and calculate key data and finan-

cial ratios, such as return on assets, using methods consistent with standards proposed by

CGAP and the Small Enterprise Education and Promotion (SEEP) Network’s Financial

Services Working Group. If a proposed method cannot be used, the analyst should thor-

oughly explain the reason and the alternative method used. Data can be entered into the

spreadsheet in local currency or U.S. dollars and can be converted to different curren-

cies automatically and displayed in both constant and nominal amounts. Templates of the

basic data to be entered in appraise.xls are provided in Annex 4 in the Resource Manual.

Numerous tables for the appraisal report are generated from the data.

Before the site visit, the analyst should schedule interviews with internal and exter-

nal MFI officials, experts, and stakeholders, such as members of the MFI’s board, the

national banking or financial services regulator, local providers of technical assistance,

xviii Appraisal Guide for Microfinance Institutions


and possibly domestic donors or foreign donors with offices in the country (if relevant).

The questions for each interview should be developed in advance.

To support various calculations, the analyst may want to obtain information on the

country’s per capita gross national income (GNI); historical inflation, interest, and

exchange rates; and peer group benchmark rates. Income, monetary, and exchange

rate data compiled by the International Monetary Fund (IMF) are available at

www.mixmarket.org/ en/environment/environment.search.asp. International benchmarks

for peer groups based on age, target market, size, region, and the like are available from

MicroBanking Bulletin (MBB) (www.mixmbb.org). The analyst also may want to review

national microfinance regulation to be familiar with regulatory issues facing the MFI. Such

information is being compiled by CGAP through the University of Maryland’s IRIS Center

and is available for selected countries at http://microfinancegateway.com/resource_

centers/reg_sup.

Step 5: Conducting the visit

The funder should decide on the scope of the appraisal (shorter or more complete)

depending on the potential funding amount, the MFI’s level of development, and the fun-

der’s key areas of interest. When visiting the MFI, the analyst should meet with the board,

chief executive officer (CEO), and management team. Depending on the scope of the

analysis and size of the institution, the analyst should visit a representative sample of the

MFI’s branches (e.g., urban/rural, recent/mature) and interview a wide range of clients

(old, new, and delinquent), staff, and other stakeholders. At the end of the visit, the ana-

lyst should organize a debriefing meeting with the board, CEO, and management team.

Additional activities may be needed, based on the goals of the appraisal. For example, an

analyst hired to assess an MFI’s social performance should budget extra time for more

extensive client interviews.

Step 6: Preparing and sharing the draft report

Depending on the amount of data collected, the appraisal report could easily become

unwieldy. Thus the analyst should focus on information and analysis most relevant to the

funding decision.

The draft report should be shared with the MFI’s board and management to con-

firm the accuracy of its information and to draw on their understanding of the insti-

tution and its clients. The analyst should discuss initial findings with the board and

xix

management and request written feedback on the draft report. The final report should

contain a statement from the MFI’s board or management about any matter where it

disagrees with the analyst.

Step 7: Distributing the final report

The final report should provide the funder with useful insights on whether to provide

funding. A quality appraisal report would also help the MFI better understand its capac-

ity and improve its performance. The commissioning funder, in consultation with the MFI,

should decide on the distribution of the final report.

xx Appraisal Guide for Microfinance Institutions

The funding recommendation should succinctly state whether funding is recommended

based on a summary of key factors and any mitigating circumstances. The recommen-

dation also should answer key questions about the MFI relevant to the appraisal’s focus:

• If funding is recommended, what is the suggested amount and type, and over what

period?

• What are the MFI’s main strengths and weaknesses? How would the funding

strengthen the MFI?

• Is the MFI profitable? If not, is it expected to be profitable within a reasonable time-

frame? What are the drivers of its (current or anticipated) profitability?

• Are there any concerns, contingencies, requirements, or improvements the MFI should

address or achieve before funding is approved or disbursed? What areas should the

funder monitor over time?

• What are the main internal and external risks facing the MFI? What are the mitigat-

ing factors?

The analyst also should discuss any other essential findings in the funding recommendation.

Most funders want to finance MFIs with reasonable portfolio quality, as indicated

by measures, such as a portfolio at risk greater than 30 days (PAR30) below 10 percent

combined with a write-off ratio below 5 percent. If the MFI’s performance does not meet

this threshold, or if it is operating in an extreme environment (such as an area recently

emerging from conflict), the funder may want to consider providing technical assistance

grants instead of direct financing.

1

Chapter One

Funding Recommendation

2.1 Summary institutional data

H Are the MFI’s performance, management, and governance reasonable, given its length

of time in operation?

• Briefly describe the MFI’s history and evolution, to provide context for its current

operations. Essential information includes the MFI’s legal name, year of incorpora-

tion, year operations commenced, and current and planned legal structure. If the MFI

is part of a larger organization, describe the structure, strengths, and weaknesses of

this arrangement (including the relationship between the organization’s microfinance

and other activities, and whether the organization keeps separate accounts for micro-

finance activities).

• Does the MFI’s legal structure meet its current and long-term needs? If not, will

transformation be possible? If the MFI plans to adopt a new legal structure,

explain how and why the proposed structure was selected, and identify related

risks.

2

Chapter Two

Overview

Table 2.1 Summary of key data

Currency:

Actual Projected

Prior Prior Current, as MBB Peer Projected Projected Year 1 Year 2 of (date) Group Year 1 Year 2

Clients and Products

1 Number of borrowers

2 Number of activeloans

Overview 3

Currency:

Table 2.1 Summary Actual Projected

of Key Data Prior Prior Current, as MBB Peer Projected Projected Year 1 Year 2 of (date) Group Year 1 Year 2(continued)

Clients and Products

3 Total gross loan portfolio

4 Number of voluntary savings clients

5 Total balance of voluntary savings accounts

Portfolio Quality6 Adjusted PAR30 7 Adjusted write-off

ratio 8 Adjusted risk

coverage ratio Efficiency and Productivity9 Average loan

balance 10 Average savings

balance11 Adjusted operating

expense ratio 12 Adjusted cost

per active client 13 Adjusted average

outstanding loan size

14 Client turnover

4 Appraisal Guide for Microfinance Institutions

2.2 Vision and mission

H Do the MFI’s management and board have the vision, ability, leadership, and expe-

rience to lead it, now and in the future?

H Does the MFI have a clear mission that is embraced and implemented by its board and staff?

Are the MFI’s mission and vision consistent with the goals of the commissioning funder?

H Include the MFI’s mission statement (verbatim), and discuss whether it is embodied in

the MFI’s daily work.

Currency:

Table 2.1 Summary Actual Projected

of Key Data Prior Prior Current, as MBB Peer Projected Projected (continued) Year 1 Year 2 of (date) Group Year 1 Year 2

Profitability15 Adjusted return

on assets 16 Adjusted return

on equityAsset/Liability Management17 Yield on gross

portfolio Macroeconomic Data18 Year-end free

market exchange rate (local currency/other currency)

19 GNI per capita

Note: MFI can use GNI per capita or GDP per capita, depending on which figure is more readily available.

Overview

H What are the main strengths and weaknesses of the MFI’s mission?

H Does the MFI have a clear target market it is trying to reach? Does it have a coher-

ent strategy for reaching that market? How successful has it been in reaching it?

Does the MFI have an unclear or vague mission? Does it have a well-defined mission

that it is not fulfilling?

2.3 Organizational strengths and weaknesses

H What are the MFI’s key strengths and weaknesses?

H What opportunities and threats does it face?

H Identify the MFI’s greatest comparative and competitive advantages and disadvantages.

How does the MFI’s competitive environment affect its outreach, growth, operations, effective-

ness, and profitability? Briefly describe management’s view of the MFI’s competitive situation.7

To what extent does the MFI take competitors into account when making key deci-

sions, such as decisions regarding operations, products, and interest rate policy?

How has the MFI handled its growth thus far? Is it prepared to manage (often rapid)

growth, in terms of staffing, products, and funding?

Does the MFI operate in transparent ways? For example, are loan files available as

needed, can portfolio quality be easily monitored, are there any unusually high inter-

branch balances, etc.? Did the appraisal unearth any concerns about transparency in terms

of reporting, operations, or behavior?

2.4 Macroeconomic and political environment

H How does the domestic macroeconomic and political environment affect (positively and

negatively) the MFI’s operations, including its ability to execute its stated strategy?

5

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7 If the MFI is large or faces serious competition, a more comprehensive competitive analysis may be appropriate. This couldinclude analysis of the number, scale, and market focus of MFIs in the local market (regionally or nationally, dependingon the MFI’s context). If data are available, provide the market share and competitive advantages of each competitor, includ-ing commercial banks and their subsidiaries, consumer lenders, NGOs, cooperatives and credit unions, postal savings banks,and other financial service providers. Based on the potential market, evaluate overall microfinance market penetrationand saturation and the implications of the competitive environment for the MFI’s current and future market share and prof-itability. This information should be as quantitative as possible and accompanied by qualitative insights.

If the economic, political, or social environment has undergone significant changes that

affect microfinance, discuss any positive or negative impacts on the MFI.

2.5 Other external environmental factors

H What other external environmental factors bear significantly on the MFI?

Identify the impact of any influential local conditions, such as a high incidence of

HIV/AIDS, a post-conflict environment, seasonal loan cycles (because of agriculture, for

example), or market disruptions because of natural disasters. Indicate how the environ-

ment could or does adversely affect the quality of infrastructure (roads, electricity, water),

availability of qualified staff, and so on. Specify the potential disruptions and risks they

pose to the MFI’s operations.


3.1 Ownership and governance

H Does the MFI’s board have the experience and commitment needed to provide fidu-

ciary and strategic oversight of the MFI? Is the board capable of enabling the MFI

to achieve its mission, guiding its strategic direction, managing and mitigating risks,

and ensuring accountability throughout the institution?

H Is the board appropriately qualified, active, and experienced in fields such as banking,

law, accounting, and social development?

Ownership

What is the MFI’s legal structure? (Most MFIs are NGOs, cooperatives, credit unions,

nonbank financial institutions, or commercial banks.)

If the MFI is a bank or nonbank financial institution, complete Table 3.1, providing

the names and types of owners and their ownership amounts and shares. (Ownership in

Table 3.1 should sum to 100 percent and to the MFI’s stated equity book value. If mar-

ket value is used instead, that should be specified.)

Indicate any relevant recent change in ownership or significant impact the composi-

tion of ownership has on the MFI’s mission, strategic direction, and operations. Also note

any significant contingencies in ownership, or puts, calls, or buyout options pertaining to

the owners. Finally, note if not all allowable capital is subscribed, or if there is a signifi-

cant upcoming increase in the number of shares.

7

Chapter Three

The Institution

Governance8

H Evaluate if and how the MFI’s board practices sound governance in terms of defin-

ing and upholding the MFI’s mission (and changing it as needed), guiding major strate-

gic decisions, managing risks and maintaining the MFI’s health, and ensuring account-

ability throughout the institution.9

H Does the board have the skills and ability to lead the MFI strategically?

H Do board members’ roles extend beyond governance and into management of the MFI?

H Do all board members agree on the MFI’s mission and strategic direction?

Indicate the number of board members and their expertise. How many board members

are “independent directors” with no other ties to the MFI? If there are outside investors

in the MFI, how many seats do they hold on the board?10

Determine how often the board meets, based on minutes of meetings and discussions

with board members. Are the board’s committees appropriate, given the MFI’s stage of

development?11


As of (Date):

Amount of Type (individual, Domestic or Ownershipcompany, bank, International (in Local Percentage

Owner Name NGO, other) currency) Ownership

1

2

3

Etc…

8 See also Natilson and Bruett 2001.9 Adapted from Council of Microfinance Equity Funds 2005.10 Equity investors with a 15% or higher ownership position typically seek a seat on the board as a condition of their investment.11 A young or small MFI may not have or need a lot of committees. Typical committees in mature MFIs include an auditand finance committee, executive committee, compensation and personnel committee, risk management and investmentcommittee, committees related to social performance management (client monitoring, market research), and temporary com-mittees for specific, time-limited issues. If an MFI accepts deposits or has reached a scale where asset–liability manage-ment is a challenge, it will likely want to form an asset–liability committee as well.

Table 3.1 MFI Ownership Summary

The Institution

Does the board have policies stipulating term limits and rotation for its members?

Does it follow those guidelines?

If board activities are not occurring, specify what practices should be established to

provide adequate board oversight.

Confirm that the MFI has guidelines preventing conflicts of interest among board

members. Specifically, do the guidelines prohibit related-party (insider) lending, require

full disclosure of all conflicts of interest, and require arm’s length business transactions? 12

Have any events damaged the MFI’s reputation and operations?

3.2 Management

H Does management have the experience, ability, vision, and leadership to lead the MFI

to achieve its mission?

H Describe the backgrounds and positions (CEO, chief financial officer, and so on) of the man-

agement team. Provide an evaluation of top management, based on fact and opinion.

H Has management handled any particularly challenging internal or external circum-

stances?

H Has management been candid with the analyst (and others) about past or current chal-

lenges facing the MFI?

H If the MFI is new, does management include anyone with a track record of achieving

sustainable microfinance in another institution or setting? If not, does management

have access to intensive support (more than a few weeks a year) from someone with

such a track record?

H How effective is management in representing the MFI externally, responding to crises

(cite examples if possible), and advancing the MFI’s vision and mission?

Would the MFI be able to operate if, for any reason, certain members of the man-

agement team were suddenly unable to fulfill their obligations?

3.3 Organizational structure

H Does the MFI’s organizational structure ensure staff accountability?

9

12 See guideline 5.3 on “Related-party (insider loans)” in CGAP 2003.

!

!

H Is the organizational structure designed to optimize the MFI’s branch network (if it

has one)?

H Does the organizational structure enhance the MFI’s efficiency and productivity? Does

it lower costs for the MFI and its clients? Do staffing levels meet client demands?

H Does the organizational structure support effective management oversight?

H To what extent do branch structure and management influence the MFI’s ability to

effectively and efficiently meet clients’ needs?

H Include the MFI’s organizational chart as an appendix to the appraisal report. Are key

functions represented in the structure?

Evaluate how the organizational structure supports management:

• How are departments or units organized (e.g., cost centers and profit centers)? Does

the organizational structure contribute to efficient processes and decision-making?

Is it appropriate for the MFI’s mission, scale, target client base, geographic dispersion,

and local environment?

• Do the number and type of staff in the MFI’s headquarters and branches match their

levels of responsibility and delegated authority? (The headquarters may be an admin-

istrative head office but is often a key branch as well.)

• Are branches treated as cost or profit centers? How effective is this approach? Are

head office costs fully and appropriately allocated among the branches?

• How is the branch reporting system organized? What inputs do branch managers have

in the annual planning and budgeting process?

Are staff functions assigned appropriately? (For example, are too many functions given

to one person, or is a single function spread inefficiently across too many people?)

3.4 Human resource management

H Does the MFI have enough motivated, trained, capable staff to implement its mission?

Table 3.2 can be used to summarize key human resource information and compare with

the MFI’s peer group.


The Institution 11

H Evaluate the MFI’s human resource management in terms of recruiting, training, com-

pensation (including salary and performance-based incentives), sanctions and promotions,

retention and turnover, and termination of staff members. To what extent are these poli-

cies and procedures institutionalized? How big a priority are they for managers?

H If the MFI has recently experienced a significant expansion in staff because of rapid

growth, provide information on the increase.

Table 3.2 Staffing Summary Data

Variance (betweenPrior Prior MBB Peer MFI and MBBYear 1 Year 2 G roup Peer group)

1 Total # staff2 Total # loan officers3 Staff turnoverStaffing Efficiency4 Personnel expense/Loan portfolio5 Average Salary/GNI per capitaStaffing Productivity6 Borrowers/Loan officer7 Borrowers per staff member8 Clients per staff Member9 Personnel allocation ratio (loan

officers/# of personnel)

Notes:

• The analyst can select which (if any) of these indicators is relevant to the analysis of human resources management.

• Data on MBB peer groups are available at www.mixmbb.org.

• Loan officers are defined as staff that interact with clients regularly specifically for loan administration.

• Savings officers are client officers who mobilize or handle savings.

• Administrative staff includes management, finance, bookkeeping, internal control, and management information sys-

tem staff; it does not include loan or savings officers, cashiers, and others who spend most of their time dealing with

clients.

• Line staff includes loan and savings officers, cashiers, and other staff with direct and continual client contact.

• The term client officers refers broadly to all staff that interact with clients for loan administration, deposits, repayment

collections, and the like. This broader staff officer definition can be useful for productivity metrics looking at a full

range of financial services, including savings and money transfers.

3.5 Information and communications technology13

H Does information and communications technology provide relevant informa-

tion for the right people at different levels of the MFI?

H Is the information reliable and available in a timely manner?

H How many days does it take for a loan officer, branch manager, and headquarters

manager to become aware of a missed payment?

H Does the MFI use the information it produces?

Functionality and expandability

Can the MIS handle the MFI’s growth? Or is it a bottleneck to growth? (See Annex 2 in

the Resource Manual for more information.)

Can the MIS easily incorporate new MFI products or expand to accommodate new

reporting needs?

If there are plans for technology upgrades or MIS staff additions, how realistic are

those plans? Identify any MIS shortcomings and their impacts on data quality and con-

trol, as well as the MFI’s proposed solutions.14

Usability

How do staff members feel about the MIS—particularly its ease of use?

Does the MIS interact with any applied delivery technologies, such as handheld

computers, point-of-service (POS) terminals, and automated teller machines

(ATMs)?15

Reporting

H How many days does it take for a loan officer, branch manager, and headquarters

manager to become aware of a missed loan payment?


13 See also Ivatury 2006. 14 More information about MISs and other technology issues can be found at CGAP’s Technology Resource Center (www.microfinance-gateway.org/resource_centers/technology), including a helpful checklist from Mainhart 1999. See also Waterfield and Ramsing 1998.15 This question helps to assess the MFI’s technological savvy and to determine whether the MFI has used good planningprocesses, measured results against expectations, effectively managed any donor funds for such initiatives, and been inno-vative in, or willing to experiment with, new technologies.

The Institution

H Are financial performance data received by managers at various levels in a timely

manner?

H Does the MIS provide any or all of the following: supervisor reports (operations,

staffing), monitoring reports (compliance, liquidity), management accounts (statisti-

cal summaries, cash flow projections, branch office and loan officer performance

data), analytical systems (costing, etc.), client interface data, market intelligence, back

office data processing, and accounting ledgers?

Client loan and savings files and resulting data in loan tracking and accounting sys-

tems ideally should be identical; if not, it should vary by less than 5 percent.

Standards and compliance

Using a small sample, verify that paper or electronic loan files correspond to loan data

in the MIS. Confirm that general ledger or accounting records flow correctly into the

financial statements. Is the loan portfolio system fully integrated with the account-

ing system? If not, comment on any quality-control measures used to ensure adequate

data transfer.

Administration and support

Analyze data security, and determine whether adequate safeguards are in place for data

retrieval, fraud protection, and physical security. Also ensure that data backup and phys-

ical security are timely and appropriate for the local environment (based on weather con-

ditions, electricity supplies, and the like).

Technical specifications and correctness

Does management have the capacity to implement technology and make technology deci-

sions that benefit the MFI?

13

!

Cost

What are the costs of purchasing, installing, and operating the MIS? Include hardware,

software, training, project management, consulting, staff time, and operating costs.

Software costs should include base prices, maintenance agreements, installations, train-

ing, and upgrades. (Note: This could be a time-consuming cost analysis and may be use-

ful only if the funder is considering support for the institution’s MIS.)

Information quality, availability, and transparency

H Is the MFI’s information—including internal, MIS, internal and external audit, prod-

uct, and portfolio data—reliable and readily available to management and staff? Is the

MFI able and willing to be transparent with its information?

H Is there a willingness to provide information and a consistency of answers across the MFI?

Describe any significant data quality or availability issues encountered during the

appraisal and their implications for the report and funding decision.

3.6 Internal controls

H Does the MFI have adequate policies and procedures to manage its operational risks?

H Does the MFI have an operations manual? Are its contents appropriate and widely

accessible to MFI staff? Does the MFI have and adhere to written policies and pro-

cedures to manage operational risks in the following areas:

• Financial operations: credit (applications and approvals, disbursements and collec-

tions, refinancing and repeat loans16), savings (approvals for opening and closing

accounts, deposits and withdrawals), portfolio quality review, and provisioning

• Procurement: purchases (requisitions through payments), payroll (hiring, remunera-

tion, personnel file documentation), and fixed assets (budget requests and approvals,

purchases, uses, security, depreciation policy, disposition)

• Treasury: cash handling, banking (accounting, account opening and closing, deposits, transfers,

withdrawals), investments, funding (donations, capital stock, debt), and liquidity management


!

16 Fictitious loans are the most common form of fraud in MFIs.

The Institution

• Financial management: budget controls, asset safeguarding, production of accurate

financial statements, and fulfillment of statutory requirements

• Other applicable areas

H How effective is the MFI at detecting fraud or other significant operational risks? Does

the MFI have adequate safeguards in its procedures, policies, and practices to prioritize

risks, detect fraud, and maintain fair and transparent human resource management?

H How are interbranch balances monitored and cleared? What are procedures for

uncleared interbranch balances?

Ask if there have been any instances of fraud or embezzlement by clients or staff. If

so, provide detailed descriptions, along with related changes in procedures and safeguards.

Has the MFI made the changes needed to avoid future occurrences of fraud or embez-

zlement? Was it sufficiently transparent about the issue?

3.7 Internal audit

H Do the MFI’s internal audit functions ensure effective use of resources, accurate finan-

cial reporting, and ample random spot checks of MFI branches, clients, and staff?

H Assess the effectiveness of internal audit functions, staffing, and responsibilities. Does

the internal audit manager report to the head of the MFI or to a committee of the

board of directors? Is the reporting structure appropriate and effective?

Include any material irregularities found by internal auditors, recommendations made,

the extent and success of their implementation, and any remaining issues to be resolved.

3.8 External audit17

H Does the MFI have an external auditor? If not, is there a valid reason? What are the

MFI’s future audit plans and requirements?

H Does the external audit accurately reflect the MFI’s financial picture? Can the board

and management adequately monitor and manage the audit process?

15

!

!

17 Further information on MFI audits is available at the Microfinance Audit Information Center (www.microfinancegate-way.org/audit/index.htm). See also CGAP’s “Disclosure Guidelines for Financial Reporting by Microfinance Institutions”(2003), to be used in addition to an MFI’s compliance with International Financial Reporting Standards or national account-ing standards.

H Does the MFI generate an annual audited set of financial statements? Has the audi-

tor issued an unqualified letter supporting the financial statements? If not, summarize

the key reasons.

H Are the financial statements reliable and publicly available?

H Attach all audit reports from the past two years.

H Does the MFI adhere to generally accepted accounting standards, such as national

standards or International Financial Reporting Standards, or the microfinance-

specific CGAP “Disclosure Guidelines for Financial Reporting”?

H Are auditors familiar with the specific risks related to and monitoring required for

microfinance and for voluntary savings mobilization?

H Evaluate the quality of audited financial statements, the composition and qualifica-

tions of the external auditors, and the frequency and track record of the MFI’s audits.

Is the audit opinion clean? How consequential are the reservations, if any? Did the

auditors produce a meaningful, useful management letter, with specific recommen-

dations emerging from the audit? Did the MFI follow up any findings in the manage-

ment letter? Did the MFI and its board address and resolve any outstanding issues?

Did the MFI implement all material recommendations made by the auditors?

3.9 Regulation and supervision18

H If the MFI is regulated, how does the prudential and nonprudential regulatory and super-

visory environment affect its ability to charge appropriate interest rates or access com-

mercial funding? Do regulation and supervision affect its operations in other ways?

H Do local laws (such as interest rate ceilings) affect the MFI’s operations and profitability?

H If the MFI is a licensed intermediary, is it out of compliance with any regulations? Review and

include any reports issued to the MFI by the supervisory authority in the past two years. Note

any corrective actions required by supervisors and whether the MFI has implemented them.

H Do any of the MFI’s operations clearly function outside the prescripts of the law? For

example, is the MFI collecting deposits illegally?


18 More information on regulation and supervision can be found at the Microfinance Regulation and Supervision Resource Center,created by CGAP and the University of Maryland’s IRIS Center (http://microfinancegateway.com/resource_centers/reg_sup). Thesite contains profiles for selected countries and a comparative database.

The Institution

Explain whether the MFI is regulated and, if so, by whom. Does the regulatory environ-

ment provide an appropriate framework for the MFI’s current and potential operations

and legal status? Address whether the supervisory agency provides adequate supervision

of the MFI.

3.10 Ratings19

H Attach all the MFI’s rating reports for the past two to three years.

H Summarize the conclusions and scores of all ratings and any key areas of strength or

concern.

H If there are concerns about the quality of a rating report and such information is avail-

able, evaluate the composition and qualifications of the rating team.

3.11 External relationships

H What are the MFI’s most significant external relationships? What impact have they had?

H What are the MFI’s most significant relationships or alliances with donors, domestic

or foreign networks (such as microfinance or banking networks), technical assistance

providers, and domestic political or commercial institutions?

How have any of these relationships affected the MFI’s ability to manage or improve its

operations? Does the MFI depend on any of these relationships? If so, what would hap-

pen to the MFI if the relationship ended?

17

19 More information on ratings and rating agencies is available at the Microfinance Rating and Assessment Fund (www.ratingfund.org).

The extent of possible analysis of an MFI’s products heavily depends on its stage of development.

If an MFI is young and small, the analyst does not need to spend much time analyzing its prod-

ucts and should mainly assess whether management is focused on making the institution’s initial

products stable and profitable. In such cases, most of the detailed questions below can be skipped.

H For larger and more advanced MFIs: Does the mix of products adequately meet cur-

rent and anticipated client demand?20 Does the MFI have the capacity to meet the

evolving demands of its clients and expand its client base? Does the MFI offer a suit-

able variety of financial products—voluntary savings, loans, transaction accounts

(such as checking), insurance, money transfers, leasing, and so on—that reflect client

demand and are aligned with its capacity? Does the MFI have effective strategies for

product design, marketing, delivery, maintenance, and evaluation?

H Summarize the MFI’s products in Table 4.1, including a brief description and the

period covered for each. Provide any useful breakdowns of these products, such as

individual relative to group loans or microcredit relative to consumer loans.

18

Chapter Four

Products

As of (Date):

Number Total Average orNumber of Active Balance Median Account

of Products Clients or Value Balance1 Savings Products2 Loan Products3 Other Financial Products4 Other Nonfinancial Products

Notes:

• Analyst can use average or median figures in this table, noting any significant outliers and their implications.

• Analyst can select number of active clients or number of active accounts, depending on what data are available from MFI.

20 Information about clients and product choices appears in the next section, on social performance.

Table 4.1 Product Summary

Products

H Does the MFI have a formal or informal code of conduct or ethics? Does it have a pro-

consumer statement or policy? If so, are these enforced? To what extent is a prod-

uct’s full cost disclosed to clients?21

• To what extent does the MFI’s mix of financial products reflect its mission and strategy?

• How are products marketed? Comment on the strategy, mix, and appropriateness of lending, vol-

untary savings, money transfers, insurance, and other financial and nonfinancial products offered.

• Are any products designed specifically for poorer clients?

• Do the MFI’s products seem appropriate given its current and anticipated growth?

Have there been any material crises related to the MFI’s products—involving, for

example, mismanagement, repayment, default, or liquidity? If so, what was the impact?

What is the current status?

Are there any significant concerns about the design, marketing, pricing, or delivery of

any of the products?

4.1 Voluntary savings22

This section addresses voluntary savings only. If an MFI requires clients to save as a con-

dition of receiving loans (forced savings), see the next section on loans. If the MFI does

not offer voluntary savings, eliminate this section from the appraisal report. If it plans

to establish voluntary savings, comment on whether the plan is credible and realistic.

H Does the MFI offer, or plan to establish, voluntary savings products? If it offers them,

what have been the main outcomes and challenges? How have these products affected

the MFI’s cost of funds, client satisfaction, and market demand?

H Is the MFI legally allowed to collect voluntary savings?

H Is savings a requirement for borrowing? (If so, these are forced or compulsory savings.)

H To what extent do the MFI’s savings products reflect its mission and strategy?

H Are voluntary savings used to fund loans? If so, what percentage of the loan portfo-

lio does savings fund?

19

!

!

21 For more information on product transparency and consumer protection, see McAllister 2000, Porteous and Helms 2005, Rhyne2003, and Acción Network 2004.22 See also CGAP’s “Consensus Guidelines on Deposit Mobilization,” in Developing Deposit Services for the Poor: PreliminaryGuidelines for Donors (2002).

H Do the lower financing costs of using savings to fund portfolio growth exceed the costs

of administering a savings program?23

H How does the MFI manage the operational risks (fraud) and the financial risks (liq-

uidity) associated with mobilizing deposits?

H To what extent is the MFI exposed to repricing risk on its deposits?

• How well does the MFI deliver it savings products?

• Has the MFI determined the fully loaded cost of its voluntary savings program? If

so, what contribution does it make to overall profitability?

• Can the MFI give a breakdown of savings deposits by size? Is it achieving its desired

average deposit size? Is it trying to increase deposits by attracting new clients, increas-

ing balances of existing clients, or a combination?

• If deeper analysis of the MFI’s savings products would offer useful insights, assess the prod-

ucts using any of the following features (as needed and if available): individual relative to insti-

tutional clients, short-term relative to long-term products (such as passbook versus time

deposits), and client characteristics (such as socioeconomic levels and types of savings products).


Voluntary Savings

45,00040,00035,00030,00025,00020,00015,00010,0005,000

0

30,000

25,000

20,000

15,000

10,000

5,000

0

2000 2001 2002 2003 Jun

2004

Total savings Total active clients

Th

ou

san

ds

23 Many MFIs would not be able to answer this question easily, because many have not done a complete cost allocation for their sav-ings programs. Even if the MFI cannot answer this question, it should be posed to consider the effectiveness of savings as a fund-ing mechanism.

Products 21

Table 4.2 Voluntary Savings Product Summary

Currency:

Actual Projected

Prior Prior Current, as MBB Peer Projected Projected

Year 1 Year 2 of (date) Group Year 1 Year 2

Savings Product 1

1 Interest Rate (%)

and calculation

method

2 Minimum deposit

to open account

3 Fees to open

account

4 Minimum deposit

per transaction

5 Fees per

transaction

6 Penalty for early

withdrawal

7 Minimum

account balance

8 Number of active

individual

savings accounts

9 Number of active

institutional

savings accounts

10 Number of

inactive indi-

vidual accounts

11 Number of

inactive insti-

tutional accounts


Currency:

Table 4.2 Voluntary Actual Projected

Savings Product Prior Prior Current, as MBB Peer Projected Projected Summary (continued) Year 1 Year 2 of (date) Group Year 1 Year 2

Savings Product 1

12 Withdrawal

frequency

(average per

period)

13 Deposit frequency

(average per

period)

14 Total individual

account balance,

end of period

15 Total institutional

account balance,

end of period

16 Individual account

balance as per-

centage of total

savings balance

17 Institutional ac-

count balance as

percentage of

total savings

balance

18 Average individual

account balance

(mean or median)

19 Average insti-

tutional account

balance (mean

or median)

Products

4.2 Loans24

Note: Loan portfolio quality is addressed in Section 6.

H What are the main features of the MFI’s loan products? What have been the key results

and challenges of each? Which products are most important to the MFI and its clients?

23

Currency:

Table 4.2 Voluntary Actual Projected

Savings Product Prior Prior Current, as MBB Peer Projected Projected Summary (continued) Year 1 Year 2 of (date) Group Year 1 Year 2

Savings Product 2

1 Interest Rate (%)

and calculation

method

2 Minimum de-

posit to open

account

Etc. Fees to open

account

Notes:

• Analyst has option of using institutional or individual breakdowns or both.

• Analyst can select number of active clients or number of active accounts, depending on what data are available from

the MFI.

Portfolio Size

90,00080,00070,00060,00050,00040,00030,00020,00010,000

0

30,000

25,000

20,000

15,000

10,000

5,000

0

2000 2001 2002 2003 Jun

2004

Gross Loan Portfolio Number of Borrower

Th

ou

san

ds

H How well does the MFI deliver its loan products? What contribution do they make to

the MFI’s profitability and strategic goals?

H Do the types of loans offered (size, individual versus group, tenor, seasonality) seem

to address client needs in that market?

H What percentage of outstanding loans is accounted for by forced savings? (If it is a

high percentage, this is a serious drawback from a client’s perspective.)

H Complete Table 4.3, summarizing loan products for the past two years and the year

to date. Where useful and feasible, distinguish between loan types, such as microcre-

dit, consumer, and mortgage.


Prior Year 1 Prior Year 2 Current, as of (date)Loan Product 11 Initial amount2 Increment / Maximum3 Term4 Repayment frequency5 Interest rate6 Commissions and fees7 Guarantees and collateral8 Theoretical interest yield (APR)9 Savings requirement (if any)

10 Number of active loans (clients), end of period

11 Average principal balance per client12 Median principal balance per client13 Average principal balance out-

standing, over period14 Total principal balance outstanding,

end of period15 Percentage of total loan balance16 Total outstanding balance

associated with loans that are:On time (and never renegotiated)

Table 4.3 Loan Product Summary

Products 25

Table 4.3 Loan Product Summary (continued) Prior Year 1 Prior Year 2 Current, as of (date)

Loan Product 1Overdue 1 to 30 days (and never

renegotiated)Overdue 31 to 90 days (and never

renegotiated)Overdue 91 to 180 days (and

never renegotiated)Overdue 181 to 365 days (and

never renegotiated)Overdue over 365 days (and never

renegotiated)Renegotiated loans—On time

Renegotiated loans—Overdue 1 to 30 days




Renegotiated loans—Overdue over 365 days

Loan Product 2 …1 Initial amount2 Increment / Maximum

Etc. Term

Note: Regarding Average Principal Balance per Client, if possible, calculate monthly averages by summing the open-

ing balance and end-month balances, then dividing by the number of months plus one. Or calculate quarterly or

annual balances. If the income statement and balance sheet include an inflation adjustment according to gener-

ally accepted practice in the MFI’s country, leave this section blank. The use of average balances here and in the

accompanying spreadsheet is a simplified deviation from standard inflation accounting. If desired, opening bal-

ances can be used instead. In this case, a separate adjustment should be calculated if there has been a major change

in the balance sheet during the year (such as a large grant), using the inflation accumulated between the time of the

grant and the end of the year.

H Does the MFI have a forced savings program?25 If so, what are its terms? Do clients have

to save in order to receive loans? Under what circumstances can clients access their sav-

ings? Is the MFI’s real reason for taking members’ savings to cover defaults by other mem-

bers of their lending groups? Does the MFI intermediate (use) the savings, or does it deposit

them in a bank? If the MFI deposits the savings in a bank, do clients earn interest?

4.3 Other financial products

H Does the MFI offer other financial products, such as checking, insurance,26 money

transfers, remittances, or leasing?27

H How useful are these products to the MFI and its clients?

H What is the institution’s capacity to manage other financial products?

Is each of the other financial products offered appropriate for the market, well designed,

and well managed? Do each of these products add value to the institution? What are the

key components of each financial product in terms of specific product management,

branding, and pricing? Has each product shown consistent growth in usage and revenues?

4.4 Nonfinancial products

H What nonfinancial products—such as marketing services or financial management

training—does the MFI offer?

H How do these contribute to the MFI’s overall services and respond to client demand?

Summarize all the MFI’s nonfinancial products, indicating whether they are tied to finan-

cial products (for example, if business training is a loan condition). Note whether they

are managed separately from financial products and whether the accounting system sep-

arates income and expenses for financial and nonfinancial products. What is the meas-

urable impact of nonfinancial products on clients and the MFI’s profitability?


25 Forced (compulsory) savings are savings payments required by loan terms or for membership, usually in a credit union, cooper-ative, MFI, village bank, or savings group. Compulsory savings are often required in place of collateral. The amount and timing ofthese deposits, as well as the level of access to them, are determined by the institution, not the client. Compulsory savings policiesvary: deposits may be required weekly or monthly, before the loan is disbursed, when the loan is disbursed, or whenever a loan install-ment is paid. Clients may be allowed to withdraw deposits at the end of the loan term, after a set number of weeks, months, or years,or when they end their memberships.26 See Churchill et al. 2003. 27 Checking and payment accounts are uncommon in many MFIs. For information on money transfers and MFIs, see Isern,Deshpande, and van Doorn 2005 and Isern, Donges, and Smith, 2006. For information on insurance, see Microinsurance Focus(sponsored by the CGAP Working Group on Microinsurance) at www.microfinancegateway.org/section/resourcecenters/microinsurance. For information on leasing, see www.itcltd.com/microleasing/ and “Leasing in Development: Lessons from EmergingEconomies” (www.ifc.org). See also Westley 2003.

27

Chapter Five

Social Performance

Table 5.1 Outreach Summary

H Does the MFI have clearly defined social goals—and a strategy for achieving them?

5.1 Intent and design

H Does the MFI have systems that are aligned with its social goals?

H To what extent has the MFI adapted its product designs, loan policies, and staff hir-

ing, training, and incentives to ensure it reaches its target clients?

5.2 Depth and breadth of outreach

Note: Rather than compiling data for funders, this section is designed to gather infor-

mation for MFIs to show how they are serving their clients and examine their social per-

formance. (See Annex 3 in the Resource Manual.)

H Is the MFI achieving its desired depth and breadth of outreach, or does it have cred-

ible plans to do so?

Depending on available information, summarize the MFI’s outreach in Table 5.1.28

Include historical data if readily available. (The MFI and the analyst should not collect

new data to complete this table; simply use what is available.)

Prior Year 1 Prior Year 2 % Change1 Population of region(s) covered2 Market size (if available)Breadth of Outreach3 Total number of active clients4 Total number of loan clients5 Total number of savings clients

(voluntary)6 Percentage of clients who are

women

Prior Year 1 Prior Year 2 % Change7 Percentage of clients located in

rural areasDepth of Outreach 8a* Percentage of recent clients

living below the national poverty line

8b Percentage of clients living on less than PPP adjusted US$1 per day

9 Average or median loan balance as % of national poverty line or GNI

10 Average or median voluntary savings balance as % of national poverty line or GNI

* The MFI should define what it means by the term recent clients. For example, M-CRIL rating agency defines recent as

less than two completed years.

Provide any variations on the data in Table 5.1 that the MFI tracks, such as average first

loan size. If the MFI targets a group other than women or rural clients, adapt Table 5.1

to reflect the institution’s focus.

5.3 Changes in the social and economic lives of clients and their households

This section applies only if the MFI is explicitly trying to improve the social and economic

lives of its clients.

H Have the social and economic lives of the MFI’s clients improved significantly since

they became clients?

If needed, open-ended questions can be posed to clients (and savings and loan officers)

about their perceptions of the MFI, such as what they like and do not like about its prod-

ucts. If further information is required, the analyst might consider incorporating addi-

tional market research, adding time to the appraisal to do so.


Table 5.1 Outreach Summary (continued)

H Is the MFI effectively measuring, monitoring, and managing portfolio risk to main-

tain its viability?

Prepare an aging of the loan portfolio in Table 6.1, including a breakdown based on

whether loans have been renegotiated.

29

Chapter Six

Loan Portfolio Quality 29

29 For more on how to test a loan portfolio, see Christen 2005 and MicroSave’s Loan Portfolio Audit Toolkit (www.microsave.org/relateddownloads.asp?id=14&cat_id=313&title=Loan+Portfolio+Audit+Toolkit).

Currency:Current, as of

Prior Year 1 Prior Year 2 % of Total (Date % of total(Amount) (Amount) Portfolio Amount) Portfolio

1 Number of overdue loans

2 Loans at risk3 Loan loss4 Loan losses

written offover the period

5 Increase in loan loss re-serve over the period

6 Principal LoanBalance for Loans that havenever been renegotiated:

Current

Table 6.1 Loan Portfolio Report

H How does the MFI determine portfolio quality? Does this method hide risk?

H What is the trend in portfolio quality? How is portfolio quality affected by seasonal factors?

H Provide a two-year summary of the portfolio, including allowance for impairments (formerly

called loan loss allowances), loan loss rates, and write-offs, noting trends in the combined story


Currency:Current,

Table 6.1 Loan as of Portfolio Report Prior Year 1 Prior Year 2 % of Total (Date % of total

(Continued) (Amount) (Amount) Portfolio Amount) Portfolio

1–30 days

overdue

31–90 days

overdue91–180 days


overdue> 365 days

overdue7 Principal Loan

Balance for Renegotiated Loans

Current1–30 days

overdue31–90 days



overdue> 365 days

overdue8 Total gross loan

portfolio

Note: If the MFI does not have systems in place to calculate portfolio at risk, it can calculate loans at risk manually instead. In

addition, the analyst can calculate the current recovery rate, even from a sample of loans. (See also Rosenberg 1999.)

Loan Portfolio Quality

of these variables. (This can possibly integrate findings from Table 4.3 and Table 6.1.) Is the MFI’s

loan loss provisioning policy adequate and in compliance with legal requirements?30 Is the MFI’s

allowance for impairments adequate, given its historical portfolio quality and write-offs?

H What is the write-off policy? Is it prudent, given the MFI’s history and operations?

H What is the MFI’s policy and practice for restructuring loans?

H What percentage of the portfolio of renegotiated loans is more than 30 days past due?31

H Does the MIS provide a clear idea of the MFI’s PAR, by product, branch, or loan officer? If

so, is risk concentrated in a certain product, branch, loan officer, or other identifiable area?

H How easy is it to track loans from disbursement to final payment? Are in-kind, delin-

quent, and refinanced loans tracked separately in the MIS?

H What do the MFI’s board and management consider acceptable levels of delinquency?

H Has the MFI experienced any delinquency crises in the past five years? (How does the

MFI define crisis?) If so, what did it do about them, and with what result?

H Is the MFI’s collections policy sufficiently aggressive and effective?

H What is the extent of loans to the MFI board and staff? Does the MFI board or staff receive pref-

erential interest rates on loans or preferential treatment for loan disbursement or collection?

H Has the MFI had any independent testing of its portfolio, such as special audit pro-

cedures arranged for that purpose?32 If not, the analyst may want to consider evalu-

ating the procedures auditors used to test the MFI’s portfolio information, especially

for delinquency and default. (The risk of inadequate control and reporting of port-

folio quality is among the most significant in an appraisal.)

H The analyst should conduct a spot check on 20–50 of the MFI’s largest loans. (This

can include detailed scrutiny of loan files, payment vouchers, and electronic data in

the local accounting system as well as spot checks on a random sample of customers.)

When reviewing trends in loan portfolio quality, the analyst should pay close atten-

tion to both absolute amounts of the past due portfolio and indicators of the past due

portfolio relative to the total portfolio, because rapid growth in the portfolio can mask

increases in delinquency and so dilute measures of portfolio at risk.

Does the MFI have a PAR30 of more than 10 percent, a write-off ratio of more than 5

percent, or a large number or percentage of renegotiated loans? If so, is management aware

of such concerns—and taking realistic, sufficient steps to strengthen the portfolio?

31

!

!

30 Legal requirements are often less stringent than needed for MFIs because they are based on collateral-based lending.31 If the MFI has significant overdue loans in the renegotiated loan portfolio, it may be on the verge of collapse andshould be examined carefully.32 Normal audits and ratings seldom include procedures sufficient to provide reliable assurance that an MFI’s portfo-lio quality reporting is accurate.

22.1%

40%

30%

20%

10%

0%


Portfolio Quality

90,00080,00070,00060,00050,00040,00030,00020,00010,000

0

16%14%12%10%8%6%4%2%0%

2000 2001 2002 2003 Jun

2004

14%

10%

1%

Gross Loan Portfolio PAR30

Th

ou

san

ds

10% 10%

Portfolio Quality

2000 2001 2002 2003 Jun 2004

14%

12%

10%

8%

6%

4%

2%

0%

PAR30

Risk coverage of PAR30

Loan loss reserve ration

32.2%37.2% 37.2% 38.0%

H Is the MFI efficient and profitable? If not, does it have a credible plan to become prof-

itable in a reasonable timeframe? What is management’s attitude toward profitability?

H Do the MFI’s financial statements and performance reflect a sound financial institu-

tion, as shown by strong portfolio quality, profitability and sustainability, asset–

liability management, and efficiency and productivity ratios—relative to other MFIs

in the country and relevant international benchmarks?

H Does the MFI use sound financial risk management to protect against losses, attract

capital, and instill confidence in the institution? Does the MFI adequately monitor,

manage, and mitigate its main financial risks?

H Can the MFI manage the financial implications of its growth—for example, by attract-

ing new funding, increasing savings, improving cash and liquidity management, and

strengthening its portfolio?

Financial performance is best evaluated in light of the institution’s context and stage of

development. Note where the MFI’s key strategic moves may have adverse short-term

financial consequences but positive long-term effects.

Before completing this section, the analyst may first want to input and adjust the

MFI’s income, balance sheet, and cash flow data in appraise.xls. Annex 5 in the

Resource Manual describes each of the line items needed for the income statement, bal-

ance sheet, and cash flow statement. Appraise.xls then requires inputs to make ana-

lytical adjustments to the financial statements and calculate information that can be

benchmarked against the MFI’s peer group, as defined in the MBB (see www.mixmbb.org

and Annex 8 in the Resource Manual). Annex 6 of the Resource Manual describes these

adjustments. Table 7.6 summarizes the macroeconomic data inputs; Table 7.7 shows

the analytical adjustments. The analyst should provide explanatory notes for all appro-

priate items—especially for adjustments derived using methods that differ from the

instructions.

33

Chapter Seven

Financial Performance and Risk Management

7.1 Financial statement analysis

H Do the MFI’s financial statements and performance reflect a sound financial institution?

Include the MFI’s income statement and balance sheet in the final appraisal report. If a

cash flow statement is available, it should be included in the appraisal. It should not be created unless

specifically requested by the funder. If needed, the cash flow statement can be created in appraise.xls.

Table 7.1 Income Statement

Currency:

Prior Year 1 Prior Year 2 Current, as of (date)1 Financial revenue2 Financial revenue from

loan portfolio3 Interest on loan portfolio4 Fees and commissions on

loan portfolio5 Financial revenue from

investments6 Other operating revenue7 Financial expense8 Financial expense on

funding liabilities9 Interest and fee expense

on deposits10 Interest and fee expense

on borrowings11 Other financial expense12 Net financial income13 Impairment losses on

loans14 Provision for loan

impairment15 Value of loans recovered16 Operating expense17 Personnel expense


Financial Performance and Risk Management 35

Currency:

Table 7.1 Income statement

(continued) Prior Year 1 Prior Year 2 Current, as of (date)18 Administrative expense19 Depreciation expense20 Other administrative

expense21 Net operating income22 Net non-operating

income/(expense)23 Non-operating revenue24 Non-operating Expense25 Net income (before taxes

and donations)26 Taxes27 Net income (after taxes

and before donations)28 Donations29 Donations for loan

capital30 Donations for operating

expense31 Net income (after taxes

and donations)

Currency:

Prior Year 1 Prior Year 2 Current, as of (date)

Assets1 Cash and due from

banks2 Trade investments3 Net loan portfolio4 Gross loan portfolio

Table 7.2 Balance Sheet


Currency:


(continued) Prior Year 1 Prior Year 2 Current, as of (date)

Assets5 Allowance for

impairment6 Interest receivable on

loan portfolio7 Accounts receivable

and other assets8 Other investments9 Net fixed assets

10 Fixed assets11 Accumulated depre-

ciation and amortization12 Total assetsLiabilities13 Demand deposits:

voluntary savings14 Demand deposits:

forced savings15 Short-term time deposits16 Short-term borrowings17 Interest payable on

funding liabilities18 Accounts payable and

other short-term liabilities

19 Long-term time deposits

20 Long-term borrowings21 Other long-term

liabilities22 Total liabilities


Currency:



Equity23 Paid-in capital24 Donated equity25 Prior years26 Current year27 Retained earnings28 Prior years29 Current year30 Reserves31 Other equity accounts32 Adjustments to equity33 Total equity

Note: Demand deposits are broken out between voluntary and forced savings (rows 13–14), which differs from the

SEEP FRAME tool.

Currency:

Prior Year 1 Prior Year 2 Current, as of (date)

Cash Flows from Operating Activities1 Cash received from

interest, fees, and commissions on loan portfolio

2 Cash received from interest on investments

3 Cash received as other operating revenue

4 Value of loans repaid5 Cash paid for financial

expenses on funding liabilities

Table 7.3 Cash Flow Statement


Currency:



Cash Flows from Operating Activities6 (Cash paid for other

financial expenses)7 (Cash paid for operating

expenses)8 (Cash paid for taxes)9 (Value of loans disbursed)

10 Net (purchase)/sale of trade investments

11 Deposits/(withdrawals) from clients

12 Cash received/(paid) for other operating assets and liabilities

13 Net cash from operating activities

Cash flows from investing activities14 Net (purchase)/sale of other

investments15 Net (purchase)/sale of

fixed assets16 Net cash from investing

activitiesCash flows from financing activities17 Net cash received /(repaid)

for short- and long-termborrowings

18 Issuance/(repurchase) of paid-in capital


H Provide an analysis of the main components of the financial statements, adapting the

guidelines below as needed.33

What are the MFI’s key accounting policies? Does it use cash or accrual accounting? How does

it account for interest on delinquent loans? Does it unduly capitalize expenditures, such as for

group formation? Does it have a policy on accounting for foreign exchange gains (or losses)?

Income statement analysis

INCOME

39

Currency:



Cash Flows from financing activities19 (Dividends paid)20 Donated equity21 Net cash from financing

activities22 Net cash received/(paid)

for non-operating activities

23 Net change in cash and due from banks

24 Cash and due from banks at the beginning of the period

25 Exchange rate gains/(losses) on cash and cash equivalents

26 Cash and due from banks at the end of period

33 See section 3.9 External Audit for further questions regarding the MFI’s audited financial statements.

H Evaluate income growth over the past two to three years.

H Has income growth kept pace with portfolio growth?

H Have there been any significant changes in the composition of income (interest versus fees)?

H How have changes in product composition affected income?

H How has asset allocation affected income?

EXPENSES

H Have expenses grown faster or slower than income?

H What are the largest components of expenses? How have these evolved?

H What (if any) measures is the MFI taking to contain expenses?

H How do the MFI’s expense ratios compare with peer benchmarks?

H Are there any unusual one-time expenses, such as large foreign exchange rates or infla-

tion adjustment loss?

NET INCOME

H How have profit margins evolved (net operating income as a share of total operat-

ing revenue)?

H Have absolute profit levels increased proportionate to growth in portfolio, number of

clients, or other drivers?

Balance sheet analysis

ASSETS

• Describe the MFI’s main assets and calculate the loan portfolio as a percentage of total

assets.

• To what extent does the MFI maximize asset returns through appropriate asset allocation?

• Have assets grown significantly over the past three years? Has portfolio growth kept

pace? Does the MFI maintain sufficient liquid assets for its liquidity needs? If the MFI’s

assets are highly liquid, is there a prudent financial reason? Are any assets restricted,

such as mandatory reserves placed in a central bank? Are there any significant issues

with large fixed assets (such as if the MFI buys a building)?

• Are assets primarily funded by debt or equity?



• Are assets used productively, with a majority funding the portfolio?

• How well does the MFI manage its funds?

LIABILITIES

• Are the MFI’s funding liabilities by source, product, and pricing competitive (in pric-

ing and terms), given its age and size? How stable and assured are the MFI’s sources

of funding liabilities now and in the short term?

• What percentage of the loan portfolio do voluntary savings fund? How has this

affected the MFI’s cost of funds?

• What percentage of the portfolio do funding liabilities finance? Has the MFI accessed

commercial funds? If so, what has been its experience? Describe the sources, terms,

and track record (credit history, repayment experience, and so on).

• If known, what have been the historical trends in the MFI’s funding liabilities, in terms

of commercial versus noncommercial, domestic versus international, and short term

versus medium and long term?

• Are the MFI’s assets and liabilities in different currencies? If so, is there a significant

mismatch? Does it expose the MFI to foreign exchange risk?

• Using data from Table 7.4, summarize trends in funding liabilities based on their type,

range, and average tenor and cost. What is the MFI’s weighted average cost of funds?

41

Funding Structure

2000 2001 2002 2003 Jun 2004

Equity Borrowings Savings

100%

80%

60%

40%

20%

0%

61.1% 61.1% 61.1% 61.1% 61.1%

33.2%

5.8% 8.2%32.1% 33.5% 35.5%

30.6%6.8% 5.3% 3.3%

CONCENTRATION RISK

Indicate whether the MFI’s assets, liabilities, or both are heavily concentrated in one

or two financial institutions. How strong are those institutions? Address the implications

of their potential failure.

In the case of a deposit-taking MFI, are liabilities concentrated among a few individ-

uals or nonfinancial institutions with large deposits? How would the MFI be affected by

a run on deposits or sudden significant withdrawal of funds?

As of (Date):

Currency:

Liability 11 Creditor (specify if domestic or international)2 Commercial or noncommercial liability

(note method of calculation if needed)3 Tenor (Term)4 Original principal balance5 Balance outstanding


!

!

Commercial Funding Liabilities Ratio

120,000

100,000

80,000

60,000

40,000

20,000

02000 2001 2002 2003 Jun 2004

Average gross loan portfolio Net commercial liabilities

Table 7.4 Composition of Funding Liabilities


Table 7.4 Composition of Funding Liabilities (continued)

6 Currency in which repayment is due7 Interest rate8 Amortization schedule9 Details of external guarantee backing the credit

extended to the MFI, if any10 Other relevant informationLiability 2 …

Note: The risk-free interest rate is the basis to determine whether liabilities are priced at commercial or noncommer-

cial rates (and so track the degree of subsidy). This table excludes deposits, accounts payable, and other nonfunding

obligations.

Table 7.5 External Grants and Subsidies

As of (Date):

Source, Date, Terms Amount Currency Funding Status

Grants

1

2

3

Etc…

Significant In-kind Subsidies

1

2

3

Etc…

Note: Include in-kind subsidies and an estimate of their value.

EQUITY

H What are the MFI’s main sources of equity?

H How much of the MFI’s equity is donated or subsidized, as opposed to derived from retained

earnings? If a lot of its equity and funding is donated, does the MFI have a realistic plan

for mobilizing commercial funds and/or raising net income to increase retained earnings?

H Does the MFI have any current or anticipated funding shortfalls?

H Do sources of equity capital (current or original investors, donors, or shareholders)

exercise ownership of the MFI? Is the MFI appropriately leveraged?

Analyze cumulative gains and losses from operations.

Using data from Table 7.5, calculate the MFI’s accumulated losses—including a break-

out between grants plus subsidies and operating results—since its inception.34

Cash flow statement analysis

Include this only if the MFI calculates a cash flow or the analyst feels that such analysis is needed.

H Has the MFI had a positive cash flow for the past two years?

H What are the significant trends in cash flow?

Asset–liability management

H Is the mix of the MFI’s assets and liabilities appropriate for the scale and maturity of

its operations?

H Is the MFI matching the rates and tenors of its assets and liabilities?

H How leveraged is the MFI when compared to peers with similar legal structures?35

H How does the MFI’s cost of funds affect its profitability?

H Does the MFI have a credible strategy for lowering its cost of funds?

H Does the MFI have any significant asset–liability risks that should be further investigated?

(For example, to what degree is it exposed to repricing risk on its deposits or other liabilities?)

If the MFI is mature and has sophisticated systems, the analyst can review the effective-

ness of the stated asset–liability management policies, the functioning of any risk man-

agement committee(s) the MFI convenes, and the abilities of staff or board involved in

asset–liability management.


!

34 Refers to historical and current grants for equity and concessional liabilities. There are several accounting methods for book-ing donor grants to an MFI. The important point is that all grants for current and previous years should appear separately fromretained earnings and other items in the equity section of the balance sheet. Material in-kind subsidies should be included as well.35 The MBB (www.mixmbb.org) can be used to benchmark the MFI’s leverage against peer institutions.


Have there been any significant changes in asset and liability risk levels or risk tolerance?

If the analyst has cause for concern that asset–liability mismatches—such as those driven by

interest rates, the tenor of assets versus liabilities, concentration of savings deposits, or large

foreign exchange risks—may cause significant damage to the MFI’s financial position, fur-

ther analysis is available in Annex 7 of the Resource Manual. The typical MFI being appraised

will not need this more in-depth analysis; it should be used only if there is a serious concern.

7.2 Analytical adjustments

Key financial rates are required to calculate the analytical adjustments to the MFI’s finan-

cial statements.36 Shadow prices from a standard source, such as the International

Monetary Fund (IMF),37 are recommended to create a data set comparable with those

in the MBB. Several different rates can be used as shadow prices, including the following:

• Inflation rate or GDP deflator

• Rate commercial banks charge conventional, medium-grade customers or, if the MFI already

borrows commercial funds, the marginal rate charged to the MFI for any additional loan

• 90-day deposit rate (if using a deposit rate lower than the rate for 90-day certificates

of deposit, an appropriate amount should be added to reflect the MFI’s likely cost of

managing such deposits)

• Overdraft lending rate from the central bank38

The selected shadow prices and exchange rates should be shown in Table 7.6.39 In all

cases, indicate what kind of rate has been selected and the source for determining it. Note

the adjustment amounts for the past two years and current period, and use them to cal-

culate the adjusted line items for the income statement and balance sheet in Table 7.6.40

These adjustments are used to calculate adjusted financial ratios.

These adjustments can be calculated easily using appraise.xls. The results will flow

into Table 7.7, on performance ratios. If explanatory details are required, Table 7.9 on

45

36 More details on analytical adjustments are available in SEEP Network 2005, pp. 39–64.37 Regularly updated IMF statistics are available on a country-by-country basis at www.mixmarket.org/en/environment/environment.search.asp.38 The overdraft lending rate is the minimum interest rate at which banks can access funding.39 For interest rates, use annual percentage rates (APRs) when available. To calculate APRs starting with the effective rate for oneperiod, annualize the rate by multiplying it by the number of periods in a year. Indicate when rates are not APRs. Average infla-tion and exchange rates over a period should be used to adjust flows (income statement items); end-of-period figures should beused to adjust stocks (balance sheet items).40 Analysts may use opening balances instead. In this case, a separate adjustment should be calculated if there has been a majorchange in the balance sheet during the year (for example, a large grant), using the accumulated inflation between the time ofthe grant and the end of the year.

analytical adjustments (found in the Resource Manual) can be included as an annex to

the appraisal report.

7.3 Financial performance ratios analysis

H Does the MFI’s financial performance reflect a sound financial institution as demon-

strated by strong portfolio quality, profitability and sustainability, asset–liability man-

agement, and efficiency and productivity ratios, relative to other MFIs in the coun-

try and relevant international benchmarks?

Multiple indicators, when evaluated and together, tell a story about the MFI’s perform-

ance. This Appraisal Guide (and its accompanying Resource Manual) examines 18 key

financial ratios recommended by SEEP (R1–R18 in Table 7.7) that address four areas of

financial performance: portfolio quality, profitability and sustainability, asset–liability

management, and efficiency and productivity (SEEP Network 2005). Table 7.7 presents

these ratios and other selected performance indicators. Analyze the MFI’s financial per-

formance over time, noting trends and possible explanations.


Prior Year 1 Prior Year 2 Current, as of (date)1 Inflation rate2 GDP deflator3 Market rate for borrowings

(IMF statistics)4 90-day certificate of deposit rate5 Prime rate paid by commercial

bank borrowers6 Marginal commercial rate

available to the MFI 7 Per capita GDP8 Per capita GNI9 Exchange rate (local currency/

other currency)10 National poverty lineNote: Analyst should pick either GDP or GNI as basis for calculations, depending on which figure is more readily available.

Table 7.6 Macroeconomic Data


Benchmarking helps MFI management and board members understand their per-

formance relative to other MFIs that are similar in terms of age, legal structure (NGO,

nonbank financial institution, etc.), lending methodology (individual versus group

lending), outreach (number of borrowers), region, and scale (size of loan portfolio).

Details on MBB peer groups are provided in Annex 8 of the Resource Manual.

Benchmark the most recent available full-year results for the MFI to appropriate peer

institutions using the MBB benchmark definitions and data.41 If information is avail-

able and the analysis is useful, consider benchmarking the MFI’s most mature branch

to the appropriate MBB peer group.42

Profitability and sustainability

H What are the MFI board and management’s attitudes toward profitability? Is it

considered a desirable and attainable goal? A pipe dream? Or is it viewed with

suspicion?

47

Portfolio,Yield, and Operating Expense120,000

100,000

80,000

60,000

40,000

20,000

0

2000 2001 2002 2003 Jun2004

Average gross loan portfolioPortfolio YieldOperating Expense ratio

40%35%30%25%20%15%10%5%0%

Th

ou

san

ds

41 Details on MBB peer groups can be found in Annex 8 and at www.mixmbb.org/en/benchmarks/2003/2003%20MFI%20Benchmarks.xls#PGdefinitions.42 In a rapidly growing MFI, most clients, staff, and branches are new, so today’s performance may not indicate the perform-ance likely in the future as growth slows and clients, staff, and branches mature. Benchmarking against mature branches andinstitutional peers helps explain the MFI’s performance and trends.


Profitability

Portfolio Yield vs Expense Ratios

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0%

50%

40%

30%

20%

10%

0%

2000 2001 2002 2003 Jun 2004

2000 2001 2002 2003

AROA AROE

Operating Expense Ratio Funding Expense Ratio

Provisions Expense Ratio Portfolio Yield


H Is management aware of the factors impeding profitability? If so, how is it address-

ing them (for example, by repricing products, managing expenses more stringently,

lowering the cost of funds)?

• How do trends in portfolio quality, pricing, and efficiency affect the MFI’s prof-

itability?

• How do the MFI’s leverage and cost of funds affect its return on equity?

• How does the MFI set interest rates?

• Does the MFI have control over its product pricing, to assure profitability?

• Do competitive pressures, usury limits, or other factors affect pricing?

• Does the MFI rely on a single financial product to drive profitability?

• How do trends in the distribution of the MFI’s assets, liabilities, and equity affect prof-

itability?

49

Staff Productivity

Number of loans per loan officer

Number of loans per staff member

2000 2001 2002 2003 Jun 2004

160133

255 255 255 255

200 200 200 200

Efficiency and productivity

H Is the MFI efficient and productive relative to peer institutions and good practices?43

H What are the key drivers of trends in efficiency?

H Is the MFI operating at optimal efficiency and productivity levels? To answer this ques-

tion, compare its performance to similar MFIs using MBB data and evaluate manage-

ment’s plans to increase efficiency—including the measures and timeframe.

7.4 Risk management44

This section is relevant only to large or mature MFIs. Further information on risk man-

agement is available in the Resource Manual.


43 Benchmarks can be found at www.mixmbb.org/en/index.html. An explanation of the benchmarking process is found in Annex8 of the Resource Manual.

44 More information on risk management in microfinance can be found at www.microsave.org/relateddownloads.asp?id=14&cat_id=59&title=Institutional+and+Product+Risk+%20Management.

Table 7.7 Performance Ratios and Peer Group Benchmarking

Prior Current, as MBB Peer

Year 2 of (date) Group [1] Mature Branch

Profitability & SustainabilityR1 Operational Self-sufficiency (OSS)R1 Financial Self-sufficiency (FSS)R2 Return on Assets (ROA)R2 Adjusted Return on Assets (AROA)R3 Return on Equity (ROE)R3 Adjusted Return on Equity (AROE)Asset/Liability ManagementR4 Yield on Gross PortfolioR5 Portfolio to AssetsR6 Cost of Funds RatioR6 Adjusted Cost of FundsR7 Debt to EquityR7 Adjusted Debt to EquityR8 Liquid RatioPortfolio QualityR9 Portfolio-at-risk (PAR) Ratio 30


H Does the MFI understand the concept of risk management?

H Is the MFI adequately measuring, monitoring, and managing its financial and opera-

tional risks?

Evaluate the MFI’s financial risk management policies and practices. If the MFI is not

familiar with financial risk management, discuss any training and steps being taken to

better understand and address this topic.

Does the MFI perform scenario or sensitivity analyses? If so, discuss the findings and

how this information has been used.

How complex is the MFI’s balance sheet? Do the tenors of its liabilities and portfo-

lio require active financial management? Mature MFIs usually form an asset–liability com-

mittee that meets regularly (weekly, monthly, or less desirably, quarterly).

Table 7.7 Performance Ratios and Peer Group Benchmarking (continued)

Prior Current, as MBB Peer Year 2 of (date) Group [1] Mature Branch

R9 Adjusted PAR RatioR10 Write-off RatioR10 Adjusted Write-off RatioR11 Risk Coverage RatioR11 Adjusted Risk Coverage RatioEfficiency & ProductivityR12 Operating Expense RatioR12 Adjusted Operating Expense RatioR13 Cost per Active ClientR13 Adjusted Cost per Active ClientR14 Borrowers per Loan OfficerR15 Active Clients Per Staff MemberR16 Client TurnoverR17 Average Outstanding Loan SizeR17 Adjusted Average Outstanding

Loan SizeR18 Average Loan DisbursedNote: appraise.xls includes additional performance indicators that may be useful for deeper analysis.

7.5 Liquidity risk management45

H Does the MFI adequately monitor and manage its liquidity?

H Has the MFI set guidelines for how many months of operating cash it wants to main-

tain? If so, is it a realistic goal? Is it being achieved?

H What liquidity management measures does the MFI have in place?

H What plans does the MFI have to address liquidity shocks? How efficient are these

plans?

H Does the MFI have cash flow projections? If so, have earlier projections been close

to actual results?

H Does the MFI adequately match assets and liabilities to reduce liquidity risk?

H Does the MFI have an overdraft line of credit with a local bank? If the MFI takes

deposits, does it adequately balance savings and liquidity requirements?

H Does MFI management actively monitor liquidity management? If so, note account-

ability, liquidity trends, ratios used, etc.

• Has the MFI experienced any liquidity crises? If so, how were they handled?

Did they affect loan disbursement or repayment of loans to the MFI or its abil-

ity to honor savings withdrawal requests from clients?

7.6 Interest rate analysis

H Given the local market, has the MFI set appropriate interest rates that will allow it

to be profitable?

H How big is the gap between the weighted theoretical interest yield and the actual yield

on portfolio? If it is more than 10 percent, explain possible reasons.

• How does the MFI establish and update loan (and deposit) interest rates?

• Are the MFI’s interest rates appropriate and responsive both to its financial require-

ments and to external factors, such as inflation?

• Do external factors affecting interest rates—such as price competition and legal con-

straints—limit the interest rates the MFI can charge on loans?


45 For more information on liquidity and cash management policies, see Women’s World Banking 2005.


Loan Product 11 Theoretical interest yield (APR)2 Monthly average of outstanding

balance on this loan product for the year (opening balance plus 12 month-end balance divided by 13).

3 Line 1 times line 2Loan Product 21 Theoretical interest yield (APR)2 Monthly average of outstanding

balance on this loan product for the year (opening balance plus 12 month-end balance divided by 13).

3 Line 1 times line 2Loan Product 3 …4 Weighted theoretical interest yield

(sum of line 3 for all loan products)5 Actual yield on portfolio6 Yield gap ratio (line 5 as a percentage

of line 4)

Table 7.8 Comparison of Actual and Theoretical Yield

Prior Year 1 Prior Year 2 Current as of (date)

H Does the MFI have a credible three- to five-year business plan and realistic financial pro-

jections to achieve or maintain profitability given its current institutional capacity?

H How have the MFI’s vision and mission changed over time?

H Where does the MFI want to strategically position itself in the local market?

H Does the MFI’s business planning process support its direction and goals?

H If the MFI is not yet profitable, describe its plan and timeframe for becoming prof-

itable and assess the plan’s credibility. Identify any potential threats to achieving the

plan, including institutional risks (such as changes in target clients, limits in institu-

tional capacity, labor disputes, and continued donor dependency) and external risks

(such as regulatory, competitive, demographic, macroeconomic, political, etc.).

• Does the MFI use short-term planning tools, such as budgeting and variance analysis?

• Does its management or board check variance analyses regularly during the year? If

so, what are the findings? How is the information used?

• Does the MFI conduct a strategic or business planning process? If so, describe it: What

and whom does it involve? Do staff members have an opportunity to provide input?

Do the method and results appear sound? If the MFI has plans for any proactive or

reactive shifts in strategy, comment on their feasibility.

8.1 Financial projections

H Has the MFI developed realistic financial projections?

• How does the MFI create its projections? What planning software, if any, does it use?

• Are the underlying assumptions and growth expectations plausible given the MFI’s

local environment and past performance (including costs, productivity, loan demand,

and growth trajectory of mature branches and loan officers), as well as industry bench-

marks (such as those produced by the MBB) for similar MFIs?

54

Chapter Eight

Business Planning

Business Planning

• Include two years of projections for the indicators in Table 8.1, if available. Are the

projections technically coherent? If the MFI does not have projections for the indi-

cators in the table, provide any prospective financial planning data it has available.

• Do not prepare financial projections for the MFI. Such projections should be prepared

by the MFI, in a process that usually takes several months. Business plans prepared by

consultants in response to external requirements, with input from the client organiza-

tion, typically are not useful.

8.2 Funding strategy

H Does the MFI have a well-designed strategy to finance its anticipated growth?

• Is the MFI’s funding plan credible given current funding relationships, amounts, and

interest rates?

• Is funding the MFI’s primary constraint to growth? Or are there more significant fac-

tors (such as institutional capacity or local competition)?

• Evaluate trends in the MFI’s cost of funds and sources of liabilities and equity relative

to its projections for future growth. How does the MFI plan to diversify funding risk?

55

Currency:

Projected Projected

Year 1 Year 2

1 Total number of clients2 Total gross loan portfolio3 Number of active loans4 Total balance of voluntary savings accounts5 Number of voluntary savings clients6 Number of staff7 Number of branch offices8 ROA9 ROENote: Use clients rather than accounts whenever possible. Add projections for other financial products as relevant.

Table 8.1 Projected Performance

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57

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www.itcltd.com/microleasing/.


The Consultative Group to Assist the Poor (CGAP) is a global resource center for

microfinance standards, operational tools, training, and advisory services. Our 33

members—including bilateral, multilateral, and private donors—are committed to

building more inclusive financial systems for the poor. For more information about

CGAP or microfinance, visit www.cgap.org.

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